China says Fed bond move may hurt other countries

By JOE McDONALD AP Business Writer

BEIJING (AP) - China's central bank chief said Friday that the Federal Reserve's move to inject money into the U.S. economy is understandable because of its slow recovery but still might hurt the rest of the world.

Speaking at a business conference, Zhou Xiaochuan said he would not comment on arguments for or against the Fed's plan to buy Treasury bonds. But he said the debate highlighted the need for reforming the international financial system.

The Fed announced this week that it would sink $600 billion into government bonds over the next eight months to lower long-term interest rates in an effort to revive economic growth

"If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for he world, it may bring a lot of negative impact to the world. There is a spill over," Zhou said.

"We have to solve this problem by reforming the international currency system," Zhou said, who gave no details on policy reforms.

Some governments have expressed concern that lower U.S. interest rates will result in more money flooding into their markets seeking higher returns, pushing up exchange rates and hurting exports by making their goods more expensive.

Zhou said he understood that the Fed's mission was to target the health of the U.S. economy, helping to create employment and keeping inflation low.

"We have a slower recovery of the economy, high unemployment and low inflation. Under these circumstances, from that perspective, when we have a policy for a very low rate that is very close to zero, and for quantitative easing, it is reasonable. We can understand ... under current circumstances, of course," said Zhou, speaking at a conference organized by Caixin, a leading Chinese business magazine.

Zhou said Chinese central bank officials met regularly with their Fed counterparts, including Chairman Ben Bernanke, and the Americans gave detailed explanations for the monetary changes.

The central bank chief also said China's controls on capital flows should shield the country from any possible upsurge in speculative "hot money" triggered by the Fed's move.

Beijing keeps its financial markets isolated from global capital flows and tightly controls the exchange rate of its currency, the yuan, which has risen more slowly against the U.S. dollar than some other Asian currencies such as the Thai baht.